A bitcoin logo is seen at a facility of the Youth and Sports Ministry in Caracas, Venezuela February 23, 2018. REUTERS/Marco Bello

Some 20 traders as well as clients such as wealthy investors, bitcoin miners, payment processors and, increasingly, hedge funds, have in around five years spawned an over-the-counter market moving hundreds of millions of dollars of cryptocurrencies daily, mostly via online messaging, participants told Reuters.

“Generally, you would go trade through an OTC desk when you have a large block trade you want to do without moving the market too much or incurring too much slippage,” said Kevin Zhou, founder of cryptocurrency-focused hedge fund Galois Capital. The traders work at firms including Chicago-based Cumberland Mining, a division of proprietary trading firm DRW Holdings; Goldman Sachs Group Inc (GS.N)-backed bitcoin payments firm Circle and New York-based broker-dealer Genesis Global Trading, owned by Digital Currency Group. OTC trades are not reported and independently audited, but some dealers said their desks often handle more than $100 million of cryptocurrency trades daily with minimum ticket sizes between $75,000 and $250,000.

OTC trading may appeal to those wary of stashing coins and fiat currency with digital exchanges after high-profile hacks and other issues.

“When the big [exchange] hacks happen we tend to see business go up,” said an OTC trader who asked to remain anonymous.

The OTC transactions are settled through bank wire transfers and by sending cryptocurrencies to digital wallets.

To be sure, OTC trading carries its own risks to participants. Price discovery is murkier, and there is higher settlement risk. Clients also need to trust brokers to vet counterparties to avoid inadvertently helping launder illegal funds.

VOLUME SPIKE

Genesis on average handles $75 million to $80 million in trades daily, 10 times year-ago volumes, Chief Executive Michael Moro said, and in December hit record monthly volume between $1.5 billion and $2 billion.

Cumberland has been adding employees and opening offices in Asia and Europe, said global head of trading Bobby Cho. Cho previously worked at exchange itBit and SecondMarket, DCG’s Genesis’ predecessor.

Most investors message traders directly, but are required by firms to undergo know-your-customer and anti-money laundering checks with their compliance departments, traders and investors said. Trades are settled bilaterally, generally by the firm’s back office. “We needed a tool that was global and more or less free and Skype provided that,” said Cho. Skype declined to comment for this article.

Still, Cho said some dealmaking has started shifting from Microsoft Corps’(MSFT.O) Skype to more mainstream platforms.

To ask to meet in the middle of a bid and offer, one party might say “Benji me” - referencing short story and movie character Benjamin Button who ages backwards and is the same age as his wife mid-life. Less romantically, traders sometimes say “butt” to mean bitcoin.

Specialised crypto traders are rare, Cho said, so hires should have a good grasp of risk management and interest in the new asset class.

Nearly all traders on major desks are men in their mid-20s or early 30s. Genesis posted a junior trader job and all 60 applications were from men, Moro said.

REGULATORY MUDDLE

While business is growing, OTC desks are grappling with an absence of clear rules from regulators.

The U.S. Commodity Futures Trading Commission calls bitcoin a commodity. The Securities and Exchange Commission has said some cryptocurrencies may be securities without specifying further.

What type of asset is traded and whether it must be traded with an accredited investor dictates if desks register with U.S. regulators and what compliance rules they follow, said Joel Telpner, partner at Sullivan & Worcester.

Genesis has registered as a broker-dealer with the SEC and the Financial Industry Regulatory Authority. It only offers trading in seven coins and, like other firms, records trader-client conversations.

FILE PHOTO: A web camera is seen in front of a Skype logo in this photo illustration May 26, 2015. REUTERS/Dado Ruvic/File Photo

“We’re about as highly regulated as you can possibly be in the digital currency space,” said Moro.

Circle’s OTC desk trades a “very limited” selection of cryptocurrencies “aligned” to its “regulatory licensure,” said Hanley, and was “working closely with regulators to foster transparency in this developing market.”

Cumberland trades 25-30 cryptocurrencies and encourages regulators to work with participants to fully understand the market and the implications of any new laws and rules, a DRW spokeswoman said.

Reporting by Anna Irrera in New York and Jemima Kelly in London; Editing by Meredith Mazzilli and Susan Thomas